Equity Loan and HELOC vs. Reverse Mortgage – What’s the Difference?

Equity Loan and HELOC vs. Reverse Mortgage - What's the Difference?There are times in our lives when the idea of freeing up cash becomes desirable or necessary. Near retirement, this is a common consideration. The typical financial tool that many retirees want to know about is a reverse mortgage, but it’s not the only equity tool available.

Equity Loan

The equity loan, or second mortgage, is essentially an additional fixed interest loan attached to the home. However, unlike the first mortgage which was used to buy the home, the second mortgage can be used for other purposes such as putting in a pool, redesigning the home to make it more accessible, or to pay for a dream vacation. This kind of loan can be set up for a long pay period which reduces its monthly financial impact. The fact that it is attached to the home can result in a very low interest rate for the borrower. However, to qualify, one does have to have the income or assets to pay it back, which may be challenging for those on a fixed income.

HELOC

The Home Equity Line of Credit, or HELOC, is similar to the equity loan, but it is not a fixed loan amount. Instead, the HELOC works more like a credit card. The homeowner makes charges against the line of credit, develops a balance and then pays it off. The homeowner retains the ability to borrow against it again, as needed. Much like the equity loan, the HELOC is attached to the home for collateral, which can result in a lower interest rate, but the borrower is not under obligation to the entire loan value at once. The HELOC can result in a lower monthly payment and can be used multiple times. Most HELOCs have a variable interest rate. 

Reverse Mortgage

A reverse mortgage is an option for borrowers age 62 or older who have a sizable amount of equity in their home. This loan takes equity out of an owned home and converts it into cash for the borrower. A key benefit, compared to other tools, is that there is no monthly payment. Many times, the reverse mortgage loan is used to pay off an existing mortgage to eliminate that monthly payment as well. The homeowner is able to stay in their home and is not obligated for repayment until the home is no longer the primary residence or he or she passes away. The loan principal and accruing interest are paid back at the end of the loan life with a balloon payment or by transferring over the home itself to satisfy the debt. The loan is never more than the value of the home at the time of origination, so in most cases the home value will have risen and is more than enough to repay the loan. Many seniors have found the reverse mortgage to be a powerful way to boost monthly cash flow in their lives and make their later years more comfortable.

The home equity loan, HELOC and the reverse mortgage are three equity borrowing tools that can effectively give a homeowner greater cash flexibility. Each have varied requirements and benefits as well as certain risks to be aware of. Contact your trusted mortgage professional who can answer your questions and help you determine the very best option for you.

Sean Young

Sean Young is a Mortgage Loan Officer in the great State of Colorado for the last 21 years, a nationally recognized real estate blogger who loves teaching Social Media, Real Estate Technology, and Continuing Education classes. Sean provides weekly Real Estate Agent Power tips and Tuesday Webinars that give the latest marketing strategies and tips on how to grow, build and increase your visibility, credibility, and brand as a Real Estate Agent. Looking for a Home Loan? Sean and his team can provide you with the expertise, professionalism, and customer service that will ensure that your transaction goes smoothly.

MyLenderSean.com is not a lender, but is the domain name and blog website for loan officer Sean Young (NMLS 191647 / LMB 100013240) who is an employee of Broker Solutions, Inc. DBA New American Funding an Equal Housing Lender licensed through NMLS 6606.
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